The Review of China's B2B Marketplace: Navigating Industrial Revolution
2C-sector investors have been gaining sky-high returns over the last five years thanks to booming China's consumer Internet industry. Today, established investors need to shift focus from 2C to 2B when targeting China’s Internet opportunities.
After showing tremendous growth over the past decade, the Consumer Internet in China has now matured. In food delivery, China—not the US—is the market leader by far. Meituan Dianping and Ele.me, generate close to USD 80 billion in gross sales annually, accounting for 64% of global market share.
Chinese consumers and almost every element of everyday life in China are highly digitalized in the downstream (C-end), however, in the upstream (B-end), China’s Industrial Internet still lags behind developed markets. In a look into Top 50 listed Internet companies (in terms of market cap) in China and the U.S., we found only two Chinese 2B (to business) players Hikvision and Foxconn out of 25 companies in total. In the aspects of digital manufacturing, smart data analytics and decision-making in the production side, and supply chain digitalization & management in the overall upstream side, China still tries to embrace digitization and innovation.
2C-sector investors have been gaining sky-high returns over the last five years thanks to booming China's consumer Internet industry. Today, established investors need to shift focus from 2C (to consumer) to 2B when targeting China’s Internet opportunities. Some (such as IDG Capital, Sequoia China, GGV, Matrix Partners China, Source Code Capital, Eastern Bell Capital) played well in the field and some (say, Tencent) are catching up.
To find promising investment opportunities in the connection of industries and the Internet, we believe it is imperative to look from past-five-years funding activities in China’s 2B field, which is regarded as the birthplace for the next giant of the Internet. We include enterprise service and B2B transaction marketplace into the broad 2B field.
We start from B2B transaction marketplace segmentation, leaving alone enterprise service in the article. After reviewing funding activities in B2B markets in China from 2014 as of June 20, we did a deep dive into its geographical, sector (we call the vertical) distribution and investment mechanism. Below are some of the key insights and hypotheses regarding the data, as well as some tactics and thinking from high profile investors.
B2B marketplace landscape has entered a mature phase
2015 saw a blockbuster year for B2B markets. This year, the deal value had reached a record high of around USD 6.6 billion across 400 deals, with average USD 17 million for each deal.
In 2015, A batch of enterprises initialed with Zhao “Find” (找 in Chinese) has been very attractive investors from IDG to Sequoia, raising USD 173 million in total. Those companies provide sales information on their platform that matches buyers and sellers, participated in the transaction process from steel, plastic, coal, oil, wood, yarn, jewelry to chemical and so on.
What defines a good vertical for B2B marketplace?
Studies from KPMG indicated the Golden Iceberg opportunity: B2B information services market is only a small fraction of the size of the industry that it targets. The information market for metals and mining, for example, is worth about USD 200 million, but the total metals and mining industry is estimated at close to USD 1.3 trillion.
That gave us a hint about what defines a good business that B2B transaction player can involve: the end-market should be large enough like commodities, metals, and oil and gas. Another criterion is concentration. B2B companies need to carve into a segmented market where there are tons of upstream suppliers (sellers) and downstream buyers (buyers); in addition, at a micro level, opportunities for B2B transaction players in some sectors are more than others. More specifically, B2B companies are likely to grow in markets where buyers or sellers face high price vitality and unstable purchasing volume. In some certain industries, both upstream and downstream are having a strong controlling power. It makes B2B companies hard to generate value in the supply chain.
One platform to rule them in all? Case study on Zhaogang & Zhaosuliao
Founded in 2014 by Mou Bin (牟斌), online plastics trading platform Zhaosuliao (找塑料, Find Plastics), for instance, raised CNY 10 million (USD 1.5 million) from Matrix Partners China in Angel Round, USD 20 million from Qiming Ventures and IDG Capital in Series A round of funding. Qiming and IDG injected another USD 36 million in its Series B round in 2015.
Buyers (for example, manufacturers of plastic packing) rely on traditional commodities wholesale markets and several brokers involving in the process normally, according to the founder Mou. By hiring experienced traders to update upstream supplies prices, Zhaosuliao enables buyers to get what they need effectively. The platform offers logistics, warehouse, and financial services as well.
When we look through the plastics value chain, however, we found the company faces an oligopoly upstream market where there are only two dominant producers: China National Petroleum Corporation(CNPC, 中石油) and Sinopec (China Petroleum & Chemical Corporation). Zhaosuliao, therefore, has little bargaining power on the upstream side.
Founded in Shanghai by Wang Dong (王东) in early 2012, Zhaogang.com (Steelsearcher, 找钢网) specializes in steel trading, connecting around 200 steelmakers in China and thousands of buyers, which face a more fragmented upstream market compared to Zhaosuliao. Steelsearcher submitted a listing application to the HKEX last June along with Xiaomi and Meituan. Before that, it raised USD 379.4m million in six rounds of financing from investors including IDG Capital, Sequoia Capital, and China Renaissance Private Equity Fund. The company suspended the listing plan this May, considering changed markets dynamics and its strategic plan.
The company runs its business more like Taobao's platform model but it wants to be next JD.com; it shifts the culture from platform to a retailer, introducing self-operation business to sell steel directly to buyers. Gross merchandise volumes sold under Zhaogang’s direct retailer arm accounted for 40.1% of total volumes in the first half of 2018. Zhaogao’s new asset-heavy business places an emphasis on direct wholesaling and retailing, in-house logistics, and highly dedicated clients service operations, as the company strives to go deep into the steel vertical. The existing steel ecosystem can, however, be hard to disrupt. Price volatility, on the other hand, hampers Zhaogang’s cash flow and profitability.
Zhaogang needs to learn from an early-adopter in B2C field like Taobao. Taobao has primarily relied on an asset-light marketplace model, leveraging technology and third-party logistics partners. It introduced Cainiao, which allows Alibaba to fully control the entire e-commerce value chain, all the way from businesses to consumers, making up for Alibaba’s weakness in logistics and self-operations.
E-commerce remains the most crowded place, as commodities and agriculture gain some traction
One of the most interesting data points that we found was that E-commerce verticals contribute most to the booming B2B marketplace. This sector has been a part of over 77.11% (in terms of value) of total B2B transactions-related investments made in 2015. Its share, however, dropped to 42.31% in the first half of 2019 (time period ended on June 20), contributing USD 781.1 million deal value to the total investment. Agriculture-focused B2B marketplace takes the crown for fastest scaling vertical. It notched a historic USD 3 billion in PE/VC investment in 2017, far outstripping the prior tally of USD 575 million in 2016. The sector also saw a 1.51% four-year CAGR (in terms of deal value) in 2018, surpassing the average 0.65% for the total B2B markets. Commodities were not far behind, registering USD 483.2 million in terms of deal value with 1.17% four-year CAGR in 2018.
2C contributes to 2B digital transformation
We’ve talked about the initial batch of essences that defines a good B2B business: vertical market size and concentration, and here is the second condition to distinguish a good target/company from hundreds of companies in the vertical: Financials and virtuous value cycle. By understanding day-to-day activities of the customers and zoom in on their current point of view, B2B offerings must deliver true value to customers. These customers are way more skilled, rational, well-prepared than 2C consumers. They choose from an abundance of products and even are more prone to existing channels; they take trails and vote with their feet. One prevalent (sometimes dominant) rule in 2C world is not working here: subsidies.
When a company is still in red at an early stage, it needs to grow fast enough to build a moat. PE/VC investors are keen on GMV (for e-commerce platform), recurring revenue streams, consumer conversion, user retention rate, UX, stable cash flow. All those metrics should prove that the business can scale, drive organic growth, and run by itself sustainably.
Beijing is handing the future of the Internet to the South region of China
326 Internet companies are headquartered in Beijing, compared to 194 companies in Shanghai. Among those 326 companies, Tech and media firm Sina, search engine giant Sougou, ride-hailing behemoth DiDi Chuxing (China’s answer to Uber), food delivery and lifestyle platform Meituan Dianping (Yelp+ GrubHub), smartphone maker Xiaomi, e-commerce platform JD.com drove Beijing and the country into a new era of the Internet.
From a geographical point of view, we found Yangtze River Delta Economic Zone (more specifically, Shanghai, Southern Jiangsu, Zhejiang) is replacing Beijing to become the new center of this new chapter of the Internet.
Shanghai has established the most developed light industry since the last century, with thousands of all kinds of wholesale and retail markets in different verticals. Shanghai continued to be a leader in textiles, iron and steel, electronic information equipment manufacturing, automobiles, petrochemical, fine chemical and so on. Thus, B2B Enterprises flock to Shanghai to pursue career can easily identify clear value needs and micro-workflows in the supply chain. Most of these enterprises are in their 30s to 40s. They share a common background: a deep understanding of the end-markets, and dare to sufficiently embrace technology and product innovation. Here are some examples:
Steelsearcher’s CEO Wang Dong has more than five years working experiences in steel industry before he quit his job in Beijing started the business in Shanghai. In 2012, he witnessed that China’s iron & steel industry was enduring a difficult time due to overcapacity and several steel brokers in Shanghai shut down.
Matrix Partners China-backed Dafengshou (大丰收，dafengshou168.com) is an agriculture e-commerce platform sells pesticide, fertilizer, agricultural tools, and books to Chinese farmers. The firm's founder and CEO Yan Zitong (闫子铜) has been researching agriculture in the PE department of Ping An Trust for five years.
Zhenkunhang (震坤行), just announced a USD 160 million round of funding led by Tencent, specializes in Maintenance, Repair, and Operation (MRO) sales. Chen Long(陈龙) founded the firm in 1998, which then was a chemical products sales agent. He repositioned the firm from a traditional retailer to an industrial product trading platform.
Electronic components trading platform JD-backed ICHunt.com (猎芯)’s founder Chang Jiang(常江) focused on the industry for more than 16 years.
Fast fashion women's sourcing platform Yishou (一手) was co-founded by a couple. Jiang Yun (蒋昀) was a serial Internet entrepreneur and Zhang Dai (张黛) was devoted to clothing chain business for eight years before they together started Yishou in 2014.